Weed Eaters and Bug Suckers?

-- I creep out from behind the couch and nervously peek between
the tightly-drawn curtains in the living room. I darkly note
that, ominously, things are getting really spooky out there,
and I am not a happy dude when I am spooked. Dangerous and homicidal
maybe, but not happy. Perhaps even a marked tendency towards
loud, hysterical outrage, but definitely not happy.

For instance, how about the
spookiness of almost no increase in Total Fed Credit last week?
$1.1 billion was almost nothing! Even Currency in Circulation
is holding steady.

Of course, we can always count
on foreign central banks, which put another $4.6 billion into
increasing the clotted hoard of over-priced, low-yielding American
government and agency debt in their custodial accounts at the
Fed. As an aside, I hear that if you stand downwind of the Federal
Reserve, you can actually smell the stench.

But even all that foreign central
bank stuff may be coming to an end very soon, as we read on Bloomberg.com
that "Bank of Japan Governor Toshihiko Fukui said Japan
needs to adjust rates from near zero percent 'without delay'
to prevent companies from investing excessively and the economy
from overheating."

So this is getting to be serious
business here, because new money has to always (homework assignment:
Underline the word "always" and meditate on its significance)
be coming from somewhere, more and more all the time, as that
is the whole point of a Ponzi finance scheme. It's the only thing
that makes it work: You either come up with more money, always,
all the time, forever, or prices of some things go down. Or the
prices of most things go down. Or the prices of all things go
down. I dunno; I never was good at multiple-choice questions,
and I am not going to try and answer this one, either.

But the world's governments
and central banks are deathly afraid that the Ponzi-finance schemes
that produced the bubbles in stocks, bonds and real estate will
go bust, as all Ponzi schemes do. It's not that they feel bad
for you (because believe me when I tell you that the government
does not give a rat's patootie about you), but because the governments
have their OWN outrageous Ponzi-schemes, such as Medicare, Social
Security and myriad other welfare/transfer/government programs.
Not to mention all the graft and corruption. Perhaps that is
why Sprott Asset Management says "Nary has a crash ever
occurred in these areas without the central banks turning on
the spigots. We highly doubt it will be any different this time."

So, these things WILL go down
in price unless, unless, unless more money gets created (by the
simple expedient of somebody going deeper into debt) to buy out
the current owners of those assets, handing them a profit that
is taxable. It's that simple.

One thing I am very, very,
VERY sure about, though, is that gold and silver will be fabulous
assets that will undergo a huge inflation in price. Another thing
that I am sure about is that one day in the not-too-distant future,
your grandchildren, with the advantage of 20/20 hindsight, will
be able to prove that in 2006, with gold and silver selling at
less than $700 an ounce and $13 an ounce respectively, precious
metals were the Mogambo Freaking Bargain Of The Century (MFBOTC),
and your grandchildren will laugh at you ("Hahaha!")
because you did not buy gold and silver then, proving that you
were so stupid that whereas even newborn babies can see that
the MGBOTC was right in front of your damned eyes the whole time,
you, perversely, kept all your money (and even put more money!)
into the Ponzi stock market, and the Ponzi bond market, and the
Ponzi government economy, and the Ponzi real estate market! Hahahaha!
Now you are forced to eat weeds and bugs because all of your
money is gone and the song was right; "Nobody loves you
when you're down and out.".

Don't think it can happen?
Well, pull up a chair and let me tell you about Zimbabwe, the
most grossly, insanely-mismanaged economy in the history of the
world; they confiscated the assets of the only profitable businesses
in the country and they printed money. For perspective, a decade
ago the Zimbabwe dollar was roughly equal to the U.S. dollar.

Anyway, according to a woman
known only as Cathy, who actually lives in Zimbabwe and gets
paid in Zimbabwe dollars, "Petrol was 260 thousand dollars
a litre three weeks ago. Last week it rose to 360 thousand a
litre and this week it galloped to 500 thousand dollars a litre
and then disappeared altogether." Disappeared!

I am thinking to myself "Big
deal! Not being able to afford gasoline just means that you have
to send your whining wife and/or kids walking to the store to
buy bread, frozen pizza, and some of those little chocolate donuts
that I love so, so much and too, too much to share with hateful,
ungrateful family members."

But perhaps I was too hasty,
and there is more to this than meets the eye! Sure enough, she
goes on to write "In complete contrast to the realities
of four-figure inflation, this week a dramatic crisis arose with
bread. Bakers put the price up, the government ordered them to
put it back down. At the price stipulated by government, bakers
said they were operating at a loss and putting twenty thousand
jobs at risk." What to do? Well, in their own defense, the
"Bakers took out a full page advert in the press detailing
the increases of everything from flour and yeast to wages, packaging
and delivery."

The result? Hahaha! The same
in Zimbabwe as everywhere else, my darling Mogambo cherub (DMC)!
For instance, our own American government calculates that there
is almost no inflation, and so price increases are, therefore,
proof of price gouging, for which you can be fined and sent to
prison! She says almost the same thing about the comparable idiocy
of the Zimbabwe government when she writes "The government
refused to allow the price increases and called in the police.
In a week over 280 bakers and shop assistants have been fined
for overcharging."

Now that we have the predictable
government response out of the way, let's now turn our attention
to the predictable economic response. She writes "As the
bread war continued all week, the obvious happened, and fewer
and fewer shops had bread on their shelves as less and less loaves
were baked." It disappeared, just like the gasoline that
disappeared! This is proof- proof! - of a Martian invasion to
take our resources and women back to Mars with them on their
flying saucers!

It is strange that she doesn't
even mention this manifest Martian menace, but instead she summarizes
it as "It has been an absurd but now familiar case of denial
by the government." At this, I laugh! I say "Welcome
to the club, lady!" All of this is no less absurd, and no
less familiar, as the denial and suppression by our own American
government, the irresponsible American press, the calumny of
the mainstream universities, and the horrid, insane Federal Reserve
about our monetary and price inflations, which differ from Zimbabwe
only in degree. Only in degree!

But this is not about how Zimbabweans
can't afford bread and are now forced to eat weeds and bugs.
Instead, the point I was painfully belaboring is that since all
of the money and assets in America are now debt ("putting
equity to work!"), and since interest rates are still hovering
around the lowest in history and thus destined to rise significantly,
that this lack of increase in Total Fed Credit is frightening,
sort of like when I came down to breakfast and my wife is standing
there wearing a hockey mask and holding a chainsaw. As she yanks
the handle, cranking it to roaring life, she lunges at me with
it, screaming "You're going down, you sick bastard!"
and my daughter is yelling encouragement "Get him, mom!"

But I'm not here to talk about
Father's Day this year. The point is that this lack of new credit
is THAT kind of spooky: It leaves an impression on you!

Perhaps we should, instead,
listen to the calm, steady and rational voice of Hans Sennholz,
who says "As soon as goods prices and wage rates begin to
rise, businessmen need additional funds. As long as the Fed provides
them, the boom can continue and even accelerate. It comes to
an end when the Fed ceases to throw new funds on the loan market
or the quantity launched no longer suffices to feed the boom.
At that time, the readjustment, that is, the recession, begins."

And I assume that it will manifested
as described by the folks at DailyReckoning.com, who write "The
feds spared the nation a serious correction in 2001. But they
did it at the expense of America's working classes, who were
lured deep into debt in order to keep spending. Now that rates
are rising, they find it impossible to continue."

If I was writing that, I would
have finished the sentence"they find it impossible to continue"
with "eating real food, and they had to eat weeds and bugs,
and they lived in their cars, and then the government turned
this excess population of weed eaters and bug suckers into Soylent
Green, a nutritious food supplement that we used to buy oil."

Anyway, this is actually about
how most assets will deflate in price, and there will be a simultaneous
inflation in some other asset. Choose wrong, and your living
standards fall to the point where you are, again, eating weeds
and bugs, but choose correctly and you can do anything you want
to do and strut around like you own the place because you probably
do. And if not, you can hire so many lawyers that you can destroy
anybody who says you don't or can't.

Putting words into the mouth
of Captain Hook, of TreasureChests.info, I note that economic
history is always boom-bust, therefore it is cyclic, and it therefore
it always repeats itself. He writes "we would like to point
out that like Rome, where it was not outside forces that finally
caused its demise, but the rot from within, sooner or later price
managers / bankers / politicos will have wrung as much speculation
out of the current population as possible, and stock markets
(most equities) will ultimately collapse in price."

-- Bloomberg reports that the
Conference Board announced that their Leading Economic Indicator
fell in May, registering a goodly-sized drop from 138.9 to 137.9.
Keep it in mind that this is known as their "leading indicator"
because it tends to anticipate future business activity, generally
agreed as three, to six, to (sometimes) nine months or so into
the future.

Seven of the leading index's
ten indicators "are known before the report is released:
jobless claims, consumer expectations, the yield curve, building
permits, stock prices, supplier delivery times and factory hours."
The three missing ones are the measures for money supply adjusted
for inflation, new orders for consumer goods and business equipment.
The Conference Board overcomes this serious obstacle by estimating
them.

But the sudden lack of growth
in M2, reflected in the lack of growth in Total Fed Credit, is
reflected in their lowering their estimate of the "money
supply adjusted for inflation". This is an important component,
as it is "the component with the greatest weighting in the
leading economic indicators index." Even so, this stagnation
in the money supply subtracted just a teensy, weensy, tiny amount
(0.14%) from the leading index.

Saying goodbye to the leading
indicator, Bloomberg went on to say "The Conference Board's
index of coincident indicators, a gauge of current economic activity,
rose 0.1 percent in May after rising 0.2 percent in April. The
index tracks payrolls, incomes, sales and projections."
Note that they make sure that you understand that this is a measure
of what is happening right now.

Oddly, this contrasts slightly
with a new report from the Census Bureau, which announced that
"New orders for manufactured durable goods in May decreased
$0.6 billion or 0.3 percent to $208.7 billion. This is the second
consecutive monthly decrease and follows a 4.7 percent April
decrease."

Bllomberg.com is not quite
so explanatory when it comes to the lagging indicator. Instead,
we must turn to The Mogambo Guide To The Indicators (TMGTTI),
where we learn that that "The Lagging Indicator is essentially
a measure of inflation and inflationary pressures." Bloomberg
does add, helpfully, that the lagging index "measures business
lending, length of unemployment, services prices and ratios of
labor costs, inventories and consumer credit", so you can
kind of figure it out for yourself The important thing is that
the lagging indicator, this indicator of inflation, "rose
0.2 percent for a third month."

-- If I take a look at the
chart of the yield for US Treasury Bonds, I open one bleary eye
and casually note that beginning in 1981, just after Volcker
finished raising interest rates to cripplingly high levels to
combat inflation, yields have been falling in a nice little zig-zaggy
channel ever since. The interesting things is that every time
the yield declined to the bottom of the interest-rate channel,
there was an immediate spike, usually up to the top of the channel
(or soon thereafter). Then it meanders down, slowly, month after
month. Over the next two, or three, or five, or seven or so years
of this slow, fitful decline in interest rates, yields would
one day again hit the bottom of the channel before immediately
rallying.

This means to me that a lot,
and I mean a LOT, of people use charts and technical analysis
to time their entries and exits. It's too supernatural and spooky
otherwise.

I bring this up because this
time rates did NOT touch the lower end of the channel before
hitting new highs! It looks like they only dropped to halfway
down the channel! And then, and then, and then, building and
building and building the suspense until you want to scream,
and then interest rates bounced up, and out, of the channel,
penetrating the upper boundary of the channel!

If you know anything at all
about charts, then you are saying to yourself "Hey! This
Mogambo idiot is right! This is big stuff! Maybe I was being
a little too rough on him when I said he was a worthless, know-nothing,
stinking, low-life moron!" Ordinarily, I would try and find
something in that rude description to disagree with, but I am
too shook up about interest rates penetrating-the-upper-channel-boundary
thing. And as a guy who is already very paranoid, scared and
edgy, my Keen Mogambo Senses (KMS) are acutely attuned, nervous
and rat-like in nature, to anything that is suddenly different
in the environment, as it usually signals danger. Danger, I tells
ya!

And if you think that rising
interest rates are not dangerous, then prepare for an important
lesson in economics!

-- I love the way Ahmed Amr,
editor of NileMedia.com, sums up our uniquely Federal Reserve
/ mainstream-university economics and monetary policy idiocy
when he says "We have become a currency exporting economy
-- a new economic phenomenon that undermines every economic theory
postulated since Adam Smith." Hahaha! Exactly!

-- Alert reader Jeffery K.
sent an advertisement for a satirical Ben Bernanke Action Figure,
which shows a bearded plastic doll sitting in a yellow plastic
helicopter, throwing hundred-dollar bills out into the air. "Now
YOU can drop money out of a helicopter!!" the package triumphantly
declares in big, bold letters.

The funniest part was the legal
disclaimer at the bottom, in tiny print: "Warning: cannot
really prevent a severe recession." Hahahaha! Excellent!

-- Tony Cherniawski of The
Practical Investor newsletter cites an article in Today's CNNMoney
that states "Hedge fund transactions now make up 30 percent
of all trades in the nation's stock exchanges, and they can have
a major impact on the markets. The funds control an estimated
$1.2 trillion in assets, according to the report."

He asks the burning question
"Could it be that a few too many hedge funds are caught
on the wrong side of their trades?" Without even waiting
for me to hazard a guess, he immediately goes on to say "Next
week will tell, since most hedge funds must provide their investors
a liquidity option at the end of every quarter. Since things
are not going well for the markets, those exercising their options
may cause what is known as a 'crowded trade.' As the Wall Street
Journal puts it in yesterday's article, 'Hedge funds are vulnerable
to 'runs on the bank,' where investors worried about their investments
demand (too many) withdrawals all at once. Thus, a string of
difficulties in the market can quickly evolve into a crisis for
a hedge fund as managers sell more and more losing investment
positions to satisfy those seeking to withdraw their money.'
"

-- I have always maintained
that investing in the stock market, over the long term, is a
net-loss game, and it should never be considered a part of saving
for retirement. And I say this because the stock market must
be, in the long run, a net-loss to the average investor. How
could it NOT be? Where did the money come from to pay Wall Street
hustlers trillions of dollars, and also pay all the people who
heretofore "made money" from this type of investing,
if not from you and me and other investors? And it actually DOES
come from you and me and other investors, as the clever Bill
Bonner at DailyReckoning.com puts it, "In order for markets
to function as they do, most investors must be wrong most of
the time."

The majority of funds (12,678)
tracked, summarized by Lipper as "All Equity Funds",
averaged 0.83% gain this year! Hahaha! Less than one percent!
When inflation is running at 4.5%! Hahahaha! Chumps!

But it is not all bad news,
of course. Even after all the supposed "carnage" in
the gold market, so you hear, the latest Lipper averages show
that gold-oriented mutual funds are actually up 13.21% since
January 1. This glittering performance is beating the living
snot out of almost every other category of funds, almost all
of which are seriously lagging inflation.

The exception was, of course,
China-oriented funds, which are up 15.48%.

With a little longer view,
being the sneaky little creep that I am, I take the words of
George Ure, of URbanSurvival.com and twist them to my advantage,
and thus having him saying the exact same thing when he reports
"Consider that the Dow closed this week at 10,989. You could
have purchased the Dow on May 7th, 1999 for 11,031. In other
words, you could have made an investment in the Dow 7-years ago,
held it as so many 'advisors' have told you, and you would have
lost money."

I rudely interrupt to note
that this is nominal gains, too! When you adjust for the huge
devaluation of the dollar in that time (inflation), it was a
net-loss! Just like I said!

But Mr. Ure sneers at me in
contempt for my rude interruption, and concludes, independently,
that "Thanks to incipient inflation, your Dow today would
need to be 13,408.76 - just to have kept even with inflation."

The class laughs at me because
Mr. Ure's sneered at me. The ice broken, he continues "In
fact buying the Dow in April of 1998 would just break even with
inflation - and 8 year ride for - nothing - on an inflation adjusted
basis using the government's figures - which as I've pointed
out (I don't know how many times) under-report real experiences
of price inflation."

As an aside, I included this
little "investing in the stock market as a retirement plan"
nugget in my latest regular report to the High Command for this
sector of the galaxy. Apparently, it was a big hit around the
universe, as it was forwarded like a virus around the 'net, and
I started getting tons of email that went "Hahaha! Making
a profit by investing for the long term? Hahaha! And earth creatures
actually believe that silly crap? Hahahaha!"

Anyway, the point is that this
has spurred a lot of economic activity in the intergalactic travel
industry, as creatures from all over the cosmos now want to come
and see you puny Earthlings believing these things, and maybe
get some nice pictures of you actually investing your retirement
money in the stock market. They are snapping up intergalactic
travel packages and renting flying saucers like crazy! It's a
boom!

-- For anyone who still thinks
that ethanol or hydrogen will solve the energy crisis, I cleverly
hide my laughter by unexpectedly stuffing a whole taco into my
mouth with one hand. With the other hand, I direct your attention
to Robert Rapier, of R-Squared Blogspot, who reports that "a
barrel of ethanol contains approximately 3.5 million BTUs, and
a barrel of oil contains approximately 6 million BTUs."
So, using Advanced Mogambo Mathematics (AMM), I quickly calculate
that you will need to use almost twice as many units of ethanol
to produce the same work and one unit of oil! And when you consider
the energy necessary to produce ethanol from seeds, to plants,
to harvest, to process- whew! -what a loser!

And while I do not have the
figures for hydrogen, I am sure that they are a LOT lower than
that, as at least ethanol contains powerful carbon-carbon bonds
like oil, so that when you break the bonds you get a lot of energy.
Hydrogen merely combines with itself and oxygen in a low-yield
way. Big deal.

And the energy available from
solar power, in total BTUs per square foot, is actually miniscule
to the point where the energy used to manufacture solar cells
is more than you will ever get back out from the solar cell as
usable energy.

There are no easy, pleasant
ways to correct monetary problems, nor the problem of energy
over-usage and dependence, and it always comes back to the maxim
"There ain't no such thing as a free lunch."

Ugh.

***Mogambo sez: You can almost smell the fear in the
gold and silver shorts, as more and more people are waking up
to the fact, without elaboration, that every time in the entire
course of history that a government committed these kinds of
monetary sins, it was gold and silver that saved the day for
those wise enough to buy and hold them. And it was curtains for
everyone else.

And the pertinent lesson is
not just that the people who bought gold and silver prospered,
but that the people who bought early in the cycle made the most
money when gold and silver rose.

Richard Daughty
is general partner and C.O.O. for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
the better to heap disrespect on those who desperately deserve
it. The Mogambo Guru is quoted frequently in Barron's, The
Daily Reckoning
and other fine publications.